So says Bloomberg Business Week in this week’s cover story. Facebook is changing the way advertising is done:

The company has developed a potentially powerful kind of advertising that’s more personal—more “social,” in Facebook’s parlance—than anything that’s come before. Ads on the site sit on the far right of the page and are such a visual afterthought that most users never click them. These ads can evolve, though, from useless little billboards into content, migrating into casual conversations between friends, colleagues, and family members—exactly where advertisers have always sought to be. […]

The Web has now advanced to the point that most large sites can serve ads based on a user’s browsing history. Google, which intercepts users at the vulnerable moment when they’re searching for information, has ridden its refined brand of targeting to $23.6 billion in revenues last year. Facebook takes targeting even further. If you recently got engaged and updated your Facebook status to reflect it, you might start seeing ads from jewelers in your hometown. They’ve likely used Facebook’s automated ad system to target recently engaged couples living in the area. If your profile mentions your appreciation for old-school hip-hop, the right local wedding DJ can find you, too.

Branding, virtually banished from the web in favor of pay-per-click revenue models, is back in a big new way:

Facebook calls its ads “engagement ads,” because they ask users to take action: play a video, vote in a poll, RSVP to an event, or just comment or click a button to indicate that they “like” it. The “like” button, which Facebook has gradually attached to just about every piece of content on its site and others across the Web, is intended to convey a general recommendation to a member’s friends. So while a great majority of users ignore the great majority of ads on Facebook, the numbers change when, say, an ad for a local restaurant is footnoted by friends’ names: (“Jordan, Jen, and 3 other friends like this”).

That social endorsement is a tiny mnemonic designed to make the ad catchier, and it works. Nielsen, which started measuring the efficacy of Facebook ads a year ago, says that if users see their friend “likes” an ad or has commented on it, they are up to 30 percent more apt to recall the ad’s message. If enough of your friends like or comment on the ad, the ad can escape its right-side quarantine and jump into your main news feed, along with the names of your friends and all the conversation around the ad. The advertiser pays nothing for this migration. In the industry, it’s called “earned media.” (Think of a teenager wearing a Nike T-shirt or Ellen DeGeneres enthusiastically talking about a product.)

Here’s where Facebook’s ad philosophy differs from Google’s. The search giant operates under the orthodoxy of traditional media. Just as in a magazine or newspaper, advertising on the site is explicitly labeled and separated from its editorial content—in Google’s case, search results are separate from sponsored links. Ads on Facebook, however, can transform into casual buzz inside a user’s news feed, the online equivalent of water-cooler conversation. …

Facebook’s promise to advertisers isn’t to get consumers to buy their products—or really even to get them to click through to their website. Instead, it wants to subtly park the advertiser’s brand in the user’s consciousness and provoke a purchase down the line. More immediately, it also aims to get you to “like” the brand yourself, which then serves as a sort of all-purpose opt-in, allowing the advertiser to insert future messages into your feed.

As would be expected from a business publication, privacy concerns are mentioned almost only in passing. I’m inclined to agree that these concerns are too often overwrought and hyped and the technical issues misunderstood or misrepresented — this Fresh Air interview of Julia Angwin about her series in The Wall Street Journal last month is a most egregious example — but transparency is a good thing and Facebook could use more of it.

The story arrives in anticipation of a keynote speech Monday at New York City’s Advertising Week by Facebook Chief Operating Officer Sheryl Sandberg (her third annual). The latest numbers from eMarketer project that advertisers will spend nearly $1.7 billion in the U.S. on social networking sites in 2010.